UK Pensions Commission Releases
Recommendations

According to a press release, the Commission’s first
report, published in October of 2004, suggested some mix of
four options to help with the nation’s troubled pension
scheme.
The options were that the pensioner will become
poorer relative to the rest of society, taxes/national
insurance contributions will have to rise, savings must
rise, and the average retirement age must rise.
The current report gives recommendations for the latter
three since the first option is the least desirable.

Adair Turner, Vice Chairman of Merrill Lynch Holdings
Ltd, is the chairman of the Commission.
Turner noted in the release that the current system
is under strain since people are living longer, baby
boomers are entering retirement, people are not saving
enough, and the state and employers plan to play a
decreasing role in providing pensions for the average
earner.
In the release he said, “There are no easy answers.
But an integrated set of policies can ensure that
increasing life expectancy becomes not a problem but an
opportunity for everyone.”

the establishment of a National
Pensions Saving Scheme into which all employees
without good existing provision would be
automatically enrolled but with the right to opt
out.

reforms to the state system to ensure
a sound foundation on which pension saving can build.
These involve a gradual move towards a more generous
state pension with the state pension age also
increasing over the long-term. In essence, this would
mean a higher pension at a later age.

measures to improve the position of
people with interrupted work records and caring
responsibilities, who are disadvantaged by the
existing contributory system.

measures to facilitate later
working and flexible retirement for those who want
it.

National Pensions Savings Scheme

The design of the National Pensions Savings
Scheme aims to encourage people to save for retirement
and enable them to do so at low cost, according to the
Commission.

Provisions of the recommended scheme
include:

automatic enrollment, but with the right to
opt out

minimum default employee contribution rates of
5% of gross pay above£5,000, of which 1% is effectively paid
by tax relief

required employer matching contributions of
3%

ability of both employers and employees to make
additional voluntary contributions

ability of the self-employed to join the scheme
voluntarily.

The Commission said in its report that the Annual
Management Charge of the new scheme should be 0.3% per year
or less.
It recommends a national payment collection system
to collect
contributions in a cost-effective and
administratively non-burdensome fashion and investment
options for members in very low cost funds bought in bulk
from the fund management industry to keep the charge
low.

A Tradeoff?

Accounting firm Deloitte & Touche had criticism
for the Commission’s recommendations.The firm says recommendations of the Pensions
Commission, if implemented, would put as many as 50,000
life and pensions jobs at risk and cost UK
businesses£4 billion a year in the short term, according to
AFX.

Deloitte estimates that the life and pensions
industry could expect to lose up to 30% of its revenue if
the proposed changes are implemented.
In addition,
Mark FitzPatrick, head of the insurance practice at
Deloitte said, “This could also have a knock-on effect on
their ability to offer other capital intensive savings and
protection products such as annuities.”

FitzPatrick believes a more effective model would
be to administer the proposed national pension savings
scheme through the life and pensions industry since
“‘This group have the existing expertise and
infrastructure in place to effectively administer the
program, which would enable the government to introduce
the national pensions saving scheme much more
quickly.”

For employers, AFX reports that David Robbins, a
partner in consulting at Deloitte, says the National
Pensions Savings Scheme will add an additional cost burden
since they are already meeting the costs of closing the
gaps in their own savings schemes.
He said employers may limit future salary increases
to make up for the additional costs.

In addition, Robbins said, “Based on the Australian
experience, we might expect some UK companies to consider
closing their occupational pension schemes in favor of
contributing to personal accounts.
A three percent contribution is a lot lower than the
level typically paid by an employer into a good company
pension scheme and the proposals may therefore act to
reduce the amount of pension savings for some groups of
employees.”

The Executive Summary of the Commission’s report can
be read
here
.
Additional related documents are
here
.